Investors could be forgiven for not giving Alumina Limited (ASX: AWC) a very long look. The company is a bit of a strange beast for the Australian market; its sole interest is a 40% stake in Alcoa World Alumina and Chemicals, or AWAC, the world's largest alumina producer.
For this reason, investors aren't making a buying decision on the local management team or specifically the Australian growth prospects, but rather the ASX-listed shares act just like shares in NYSE-listed Alcoa Inc, less any less local head office and interest expenses.
A Poor Investment?
The company's shares have been a fairly average investment over the long term, with the one, three and five-year return at 7%, 123%, and negative 5% respectively. Sentiment has also been hit due to the company operating in the cyclical aluminium industry.
So where are the positives?
I picked Alumina as one of my top stock picks for 2015 in January and still believe the share price will recover from the 17% fall so far this calendar year. Here are five reasons why Alumina is worth another look:
- Alumina is one of the lowest cost producers. Like we've seen in the iron ore industry, a slump in the commodity price will hurt high cost producers and sometimes even result in improved conditions for the lowest-cost producers. Five of Alumina's eight alumina refineries are in the lowest 25% of the cost-curve globally.
- Aluminium demand is set to remain strong and increase. The increase in lightweight manufacturing will be a long-term driver of increased demand for the aluminium products that Alumina contributes to. Cars, aircraft, buildings, bikes and even defence products are all moving to greater use of aluminium components.
- Alumina is actively lowering production costs. Alumina is divesting high-cost production and has benefitted from lower oil prices over the last 12 months, resulting in a 25% increase in income in the March quarter and 16% in the June quarter.
- Alumina has the largest market share of the major players. Alumina's 15% share of the global market is more than that of key rivals BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Chalco. Its dominant position gives it a small competitive edge in the market.
- Alumina could start making purchases. Alumina has been expanding the business, but could look at making strategic acquisitions of other low-cost production facilities by continuing to delay decent dividend payments.
Risks
Obviously there are environmental and political risks investing in Alumina. The group has operations all over the world but has a long and strong operating history. China continues to be a major aluminium producer and has shown a tendency to prop up local industry despite it being loss making.
Reconsider Alumina
Based on the points above, Alumina remains firmly on my watch list as a potential near-term purchase.
